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February 19, 2014

Jeremy Siegel: Don’t Fear a Correction; Stocks Still Cheap

Stocks remain ‘10% to 15% under fair market value,’ Jeremy Siegel believes, so any correction would represent a buying opportunity

Wharton professor and WisdomTree advisor Jeremy Siegel. (Photo: AP)

Jeremy Siegel, the WisdomTree advisor and Wharton professor, remains positive about U.S. stocks in 2014, even though he thinks “we’ll probably have” a 10% correction “sometime this year.”

When that correction hits, he thinks it “would actually be a very good entry point” for buying stocks, and that “anyone with an intermediate- to longer-term orientation will be a winner coming in at these levels,” which he considers “below what I consider long-term, fair-market valuation.”

Speaking with Morgan Stanley Wealth Management’s CIO, Mike Wilson, Siegel said stocks remained undervalued. “I think we’re around 10% to 15% under fair market value,” he said in an interview published in Morgan Stanley’s February 2014 Market Outlook.

Moreover, Siegel took Wall Street to task for what he thinks was its misplaced focus on quantitative easing as the main driver of the bull market. “I think the biggest miss on Wall Street is that the stock market rally is due to quantitative easing,” he said in the interview, and while he admits that the Fed’s liquidity actions are “not a negative factor… this market can be fully justified on the basis of valuations.”

As for emerging markets, Siegel believes they are still undervalued, citing their lower-than-long-run average P/Es. “In the three-to-five- year term," he said, "I believe investors will be rewarded by investments there.”

Turning his gaze back home, Siegel remains bullish on the U.S. economy as well, suggesting GDP growth of 3.5% to 4% is likely in 2014, helped by the lack of the “fiscal drag” that the economy faced in 2013, which included the 2% payroll tax increase, new high marginal tax rates on high-income earners and the sequester. Without those drags, he said “maybe we can get the private sector moving.”

As for interest rates moving higher, “I think rates are going up,” he said, but “ I don’t think we’re heading for the double digits,” though he does suggest that the 10-year should be at "4%, 4.5% by the end of this year.”

The rise in rates may be the trigger for the correction, he said, since “there are hundreds of billions, if not trillions, of dollars, just on tactical asset allocation, moving between stocks and bonds.” However, if rates rise due to “real economic growth, not rising inflation, it’s good for stock prices.”

When asked by Wilson about the outlook for alternative investments, Siegel said he still saw value in U.S. real estate, but that he remained “skeptical of gold.” Last year’s gold trade, he said, was “motivated primarily by those who thought hyperinflation was going to come or there was going to be a financial collapse. Both eventualities have become very remote. I don’t see much of an increase in gold this year.”

While he said there remains “room for gold in a diversified portfolio,” the Stocks for the Long Run author argues that “stocks, being so liquid, are still very attractive and should be the bulk of your wealth holdings.”

With all this optimism, what does Siegel worry about? “Europe could disappoint,” he says, and if he sees “run-ups in commodity and oil prices, I would think we don’t have as much slack in the economy as I thought.”

He also thinks “there’s going to be disappointment on the periphery” in Europe, where even though those nations “are tied to the euro, they don’t get German rates because of the risk premium." Those periphery nations are faced with interest rates in the 5% to 7% range, and without the balance sheet corrections in stocks and real estate “that’s put so many Americans back in a positive position.” One solution, he suggests, would be “bringing the euro down," an action that “would help exports and the tourist trade dramatically.”

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